Wednesday, August 8, 2007

Let's Nip This In the Bud

From the Telegraph:

Two officials at leading Communist Party bodies have given interviews in recent days warning - for the first time - that Beijing may use its $1.33 trillion (£658bn) of foreign reserves as a political weapon to counter pressure from the US Congress.

Shifts in Chinese policy are often announced through key think tanks and academies.

Described as China's "nuclear option" in the state media, such action could trigger a dollar crash at a time when the US currency is already breaking down through historic support levels.

Before this comes even close to out of hand... there is no way this is going to happen.

Let's play this out.

China dumps dollars.

Dollar drops hard

US economy enters recession

China's biggest foreign market stops buying Chinese goods.

The US and China have a symbiotic relationship -- we need each other. They supply us with credit, we provide a $9.7 trillion dollar consumer market. While the overall relationship can't last forever, there is no reason to destroy it either.

If our growth rate drops, so does theirs. And the last thing the Chinese government wants is a slowing economy that contains 1 billion people who may start protesting for democratic reforms.

It's important to remember the Chinese play a very complicated foreign policy game. I would suggest reading Henry Kissinger's White House Years to get an idea for the levels of complexity involved. Bobby Fisher's chess strategies are simpler.